Currency Pairs Explained for Retail Traders

Currency pairs are among the most popular questions I am always asked. Sometimes it surprises me how someone wants to trade while he still doesn’t know what currency pairs are. But I should not be surprised, because we always focus on the advanced topics like technical analysis, candlesticks, indicators… and we forget about the basics. We do not consider that beginners may have difficulties in understanding the currency pairs that is the foundation of currency trading through retail brokers.

In the stock market, you trade the shares of the companies. You buy and sell them. You pay money to buy the stocks. But what if you wanted to trade or buy and sell currencies?

In the stock market, companies’ shares are commodities and the currency you pay to buy them is the money. It is the same in any other kinds of trading. You pay money to buy a commodity. In foreign currency exchange, you trade currencies. So again, you have to pay something to buy something else. You pay a currency to buy another currency. You sell a currency against another currency. To be able to do that, they have created currency pairs. For example EUR-USD is a currency pair. In each currency pair, the first currency is the commodity and the second currency is the money. In EUR-USD, the first currency which is Euro is the commodity and the second currency which is USD, is the money.

When you buy EUR-USD, in fact you pay USD to buy Euro. No matter in what currency your trading account is. You can have a trading account in USD, GBP, CAD or any other currency. When you want to buy EUR-USD, your broker changes your trading account capital into USD and then pays that USD to buy Euro. This is how it works. Any trade in the market has to be done through USD. US dollar is the main currency and is the axis of all transactions on the currency market. Any currency pair that you buy or sell, has to be done through USD. These processes will be done automatically and you just need to click on the buy or sell buttons.

Let’s get back to our example, EUR-USD.

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“Long” and “Short” Positions

As it was mentioned above, when you buy EUR-USD, in fact you pay USD to buy Euro, or you buy Euro against USD. It is possible to sell EUR-USD even before you buy it. How? Let me give you an example. You borrow my car for two weeks. Suddenly you see someone wants to buy the car from you with a good price like $5000 above the market price. You sell my car. But you have to return my car after two weeks, right? When it is time to return my car, you go and buy exactly the same car, but with the real price which is $5000 lower than the price that you sold my car. You return my car while you have made a $5000 profit.

This is what we do when we sell a currency pair before we buy it. You sell EUR-USD high and buy it low. You sell it low and buy it lower. This is how to can make profit by selling a currency pair.

When you buy a currency pair, you take a “long” position and when you sell a currency pair, you take a “short” position.

Long and short are just the terms we use in trading and they have nothing to do with the length of anything. They are just terms. Of course usually it takes “longer” for the price to go up and “shorter” to go down, because price goes up because of greed, and it goes down because of fear, and fear is much stronger than greed, and so it causes the price to go down much faster compared to the time it goes up. That’s why when you buy, they say you have a long position, because it may take a longer time for the price to go up. And when you sell, they say you have a short position because it may take a shorter time for the price to go down.

Anyways!

So when we say we go long with EUR-USD it means we buy EUR-USD or indeed we buy EUR against USD, and visa versa.

Now let’s answer the “frequently asked questions” I always receive about currency pair.

What Are the Major Currency Pairs?

There are four major currency pairs in the market: EUR-USD ; GBP-USD ; USD-JPY and USD-CHF.

What Are the Most Popular Currency Pairs?

Among the four major currency pairs, EUR-USD is the most popular and has the highest volume of transactions. They say more than 70% of transactions in the trading world is focused on EUR-USD. But it doesn’t mean that 70% of the retail traders like you, trade EUR-USD only.

Markets are not limited to what the retail traders do. In fact, traders are a very small portion of the markets. The big transactions are done by the big market participants like the central banks. Sometimes they do it not because of making profit, they do it because they have to. Sometimes a country has to sell its own currency against another currency to lower its currency value and control its price.

The most popular currency among retail traders is GBP-JPY and EUR-JPY and also GBP-USD. GBP-JPY is the king of the currency pairs for the retail day-traders because it is so volatile. However, it is also so risky specially when it is traded through the shorter time frames. The reason is it is so volatile and strong. Its trading signals are sharp and strong, and it has a wide movement scale. Day traders trade GBP-JPY to make more profit, but this double edged sword because your losses can also be so bigger.

What Are the Most Liquid Currency Pairs?

EUR-USD is the most liquid currency pair because it has the highest trading volume. However, you will not have any liquidity problem in the markets because it is such a huge market. It is not like the stock market that sometimes you can not find a buyer for the shares that you have already bought and you want to sell.

Of course, there are two kinds of brokers. Liquidity can be a problem for the true ECN/STP brokers. Market maker brokers sometimes pretend that they have liquidity problems. They don’t send your trades to any banks.

What Are the Most the Most Volatile Currency Pairs?

As I said, GBP-JPY is the most active and the most volatile currency pair. EUR-JPY has the second position in volatility and activity. GBP-JPY and EUR-JPY were used to follow the same direction. But it is a while that they have changed. When one of them went up, the other one did the same too, and visa versa. GBP-JPY and then EUR-JPY are the most traded currency pairs among retail traders.

In general, GBP cross currency pairs are the strongest. GBP-AUD and GBP-CAD are also a strong currency pairs.

What Are the Best Currency Pairs to Trade?

I don’t know about the other traders, but if you ask me about the best currency pairs to trade, I will say when a currency pair forms a strong and sharp trade setup based on one of the trading strategies that I follow, it is the best currency pair to trade the trade setup it has formed. I see some traders fall in love with a special currency pair and try to trade it only. This is wrong. You limit yourself and ignore the free opportunities that the markets give you. There are several currency pairs in the market that you can trade. Why should you ignore all of them and focus on one?

They say you should focus on one currency pair and “master” it. This is another “nonsense idea”. Currency pairs are not like different jobs that you have to focus on one of them to master it. There is the same rules and techniques to trade all of the currency pairs. A support line breakout is a sell signal in any currency pair. Find a valid support line on a currency pair price chart and go short after its breakout. No matter what currency pair it is. You make money. Of course don’t forget to set a reasonable stop loss always otherwise you can wipe out your account 😉

Do not believe everything you read and hear. Some people start writing articles and e-books when they give up on becoming a profitable trader. So they try to make money through selling their eBooks and training courses. Unfortunately 95% of the books, articles and training courses are written and managed by these people. And those articles, books and training courses are the main sources of “nonsense ideas” like the one that I explained above.

When you follow the longer time frames like daily, weekly and monthly, you can trade several currency pairs when they form a trade setup on any of these time frames.

What Is the Best Time to Trade Currency Pairs?

Again I have my own answer to this question and my answer can be different from the other answers you may find over the Internet. The best time to trade a currency pair is when it forms a strong and sharp signal. That is it.

This question is mainly asked by the day traders who trade using small time frames like 5min or 15min. They want to have a trading session every day and they do not like to have any open position during the night. Whether I agree with this idea or not, I will not focus on it here because this article is about the currency pairs.

There are three main sessions: London session, New York session and Asian session.

London session is from 8am to 4am GMT. New York session is from 8am to 4pm EST and Asian session is from 7pm to 3am EST. Currency market has the highest volatility when both of the London and New York markets are open which is about 8am to 1pm EST. Then at 4pm EST that they close the New York stock market, the markets become slow. But after a few hours, Japan and then Australia start working and so markets become volatile again.

Back to the question that “what is the best time to trade currency pairs?”, I have to say that when markets become active and volatile, all of the currency pairs move, not just some special currency pairs. It doesn’t matter what session it is. So basically this question is not a correct question. You can trade any currency pair when market is moving and there is a strong trade setup.

What Are the Exotic Currency Pairs?

USD-SEK (Swedish krona), USD-DKK (Danish krone) and USD-NOK (Norwegian krone) are the most famous exotic currency pairs. They are called exotic because of their pip value. Their pip value is much smaller than the other currency pairs like EUR-USD.

When you trade one of these pairs for the first time, you may not believe your eyes when you calculate your stop loss and take profit. A stop loss that has to be placed above the previous candlestick, has a several hundreds of pips value. But don’t scare. Those pips are not like the ones your see in other currency pairs. I call them mini pips. They are about 1/10 of the value of the normal pips.

Exotic currency pairs are not limited to those three. EUR-NOK, EUR-SEK, EUR-DKK and GBP-NOK, GBP-SEK and GBP-DKK are even more exotic 🙂

Do You Have the Currency Pairs List?

Each broker supports a different number of currency pairs. However, all of them support the 4 major currency pairs and most of the other popular and known currency pairs:

EUR-USD
GBP-USD
AUD-USD
NZD-USD

USD-JPY
GBP-JPY
EUR-JPY
CAD-JPY
AUD-JPY
NZD-JPY

USD-CAD
EUR-CAD
GBP-CAD

USD-CHF
EUR-CHF
GBP-CHF
CAD-CHF

USD-SGD
USD-DKK
USD-SEK
USD-NOK

EUR-AUD
GBP-AUD

EUR-GBP
AUD-NZD

What Are the Cross Currency Pairs and What Is the Currency Pairs Correlation?

Almost all currency pairs are correlated to each other because they are dependent on USD, directly or indirectly. US economy and so the USD value impacts the whole world. However, some currency pairs like EUR-USD and USD-CHF are so correlated to each other and one of them goes up, the other one goes down, and visa versa. You can learn about currency pairs correlation in more details here.

Trading through the Banks

You will trade the currency pairs only when you trade through the retail brokers platforms. However, there is no currency pair when you trade through a bank account and you have to buy and sell each currency against the other one through exchanging them. You learn more about trading the currencies through a bank account by following the below articles: Trading Through a Bank Account

Thanks for the insights. I spoke to a friend today and I asked him what he did for a living. I thought he was a Pro Golfer because he seems to golf in every country he visits. He said that he trades currency! So I became interested and wanted to know more about it. Immediately I am online trying to get the basic understanding and this page has really educated me on the subject matter. I think I want to start trading myself. So, thank you very much for the insight!

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can you tell us why the Chinese currencies don’t belong to the major pairs?

What are your thoughts on the RMB currency? China establishes alternatives to SWIFT, IMF etc. and strives to replace the USD one day. Maybe you know their aggressive advertisements (e.g. Bank of China) which is titled similar to “RMB – new choice – world currency”.

What do you think will happen about the RMB and its impact on trading?

China wants to control the value of their currency and so they have not agreed to allow their currency to be traded on the global currency market during the past several years. It seems now they want to enter the market, but they are just testing the water for now.

Chris, I have some doubts about how the currency pairs work and I’d be grateful if you could help me.

If we sell EUR/USD, we sell euro and buy USD. If we made the right choice, the USD value will increase. Then, when we close the sell position, we automatically buy back euro, but since the USD we have is stronger now, we can buy EURO than when we sell and make a profit. The difference between the value of the euro that we sold and the euro we bought back, it’s our profit.

However, the profit in pips is always USD, cause EURO is the commodity we sell and buy and USD is the money.

Great thorough post that is to the point at all times yet easy to understand! Awesome job Chris! Is there anything your not good at? lol Pleasure to be mentored by the best YOU! Thank you for your tireless dedication to this wonderful industry and to helping people by teaching them to fish instead of giving them one.